An insurer was not entitled to rescind a policy based on an insured’s answers to ambiguous questions in an application for insurance. ( Duarte v. Pacific Specialty Insurance Company (2017) 13 Cal.App.5th 45)
Facts
Victor Duarte owned a rental property in Oakland. In 2009, Jennifer Pleasants became a tenant at the property. Pleasants occasionally sold motorcycle parts from the rented property and operated a “welding shop” there.
In February 2012, Duarte gave Pleasants a 45-day notice to quit, but Pleasants did not vacate the premises. Instead, in March 2012, Pleasant complained to Oakland housing authorities that the premises suffered from various problems, including roof leaks, plumbing leaks, deteriorating floorboards, pest infestation, mildew, etc. That same month, Duarte responded by informing housing authorities that Pleasants was operating a welding shop at the premises. In early April 2012, housing authorities sent Duarte written notice of a mediation to be held in June 2012.
On April 19, 2012, Duarte applied for a landlord’s policy through Pacific Specialty Insurance Company (Pacific). The application contained various questions. Question 4 asked, “Has damage remained unrepaired from previous claim and/or pending claims, and/or known or potential (a) defects, (b) claim disputes, (c) property disputes, and/or (d) lawsuits?” In response, Duarte answered “no.” Question 9 asked, “Is there any type of business conducted on the premises?” In response, Duarte again answered “no.” Pacific approved Duarte’s application for insurance and issued a landlord’s policy to him. Pacific then sent a property inspector out to the property, and the property inspector reported that there was “no business, farm or ranch” operating on the property.
In June 2012 (two months after the policy was issued), Pleasants filed a lawsuit against Duarte alleging that various problems had existed with the premises throughout Pleasants’ tenancy. Duarte tendered the lawsuit to Pacific, but Pacific refused to defend Duarte.
Duarte sued Pacific for breach of contract and bad faith arising from Pacific’s refusal to defend Duarte against Pleasants’ lawsuit. Pacific moved for summary judgment, arguing that it had a right to “rescind” the policy based on material misrepresentations by Duarte in the application. The trial court granted Pacific’s motion for summary judgment. Duarte appealed.
Holding
The California Court of Appeal reversed, holding that Pacific had failed to establish Duarte made material misrepresentations in the application for insurance.
Specifically, Pacific had failed to show that Duarte made any misrepresentation by answering “no” to Question 4. That question asked, “Has damage remained unrepaired from previous claim and/or pending claims, and/or known or potential (a) defects, (b) claim disputes, (c) property disputes, and/or (d) lawsuits?” According to the appellate court, Question 4 contained “garbled syntax” and was “utterly ambiguous.” The court rejected Pacific’s argument that Question 4 should be interpreted as asking if there was unrepaired damage from a previous claim, or if there were any pending claims, or if there were any known or potential defects, claim disputes, property disputes and/or lawsuits. Rather, Question 4 “is reasonably construed as simply asking whether damage has ‘remained unrepaired’ from various past events, such as a ‘previous claim’ or a property dispute or lawsuit.” Because Question 4 was ambiguous, Duarte’s “no” answer to that question did not provide Pacific with a basis to assert misrepresentation in the application as a defense to coverage.
Similarly, Pacific had failed to show that Duarte made any misrepresentation by answering “no” to Question 9. That question asked “Is there any type of business conducted on the premises?” According to the appellate court, Question 9 could reasonably be interpreted as referring to “regular and ongoing business activity,” and it was unclear whether Pleasants was engaged in “regular and ongoing business activity” at the rental house at the time Duarte applied for the policy through Pacific. Moreover, after Duarte submitted the application, Pacific’s own property inspector reported to Pacific that there was no “business, farm or ranch” operating on the property. Under such circumstances, the appellate court was “not persuaded” that Pacific had met its burden to show that Duarte misrepresented the existence of a business on the premises at the time Duarte submitted the application for insurance. At a minimum, there was a triable issue of fact as to whether Duarte had made a material misrepresentation when he answered “no” to Question 9.
Based on the above, the appellate court remanded the case to the trial court for further proceedings.
Comment
Generally speaking, an insurer has the right to rely on an applicant’s answers in an application for insurance without verifying the accuracy of the answers. However, an insurer cannot rely on an applicant’s answers where the questions themselves are ambiguous or unclear. In the Duarte case, the appellate court basically held that Question 4 was ambiguous as a matter of law. The court characterized the other question – Question 9 – as “more straightforward,” but concluded that even that question was subject to more than one interpretation.
The lesson from the Duartecase is that when an insurer pursues a “rescission” or “misrepresentation” defense based on an insured’s answers to questions in an application, the questions themselves must be clear and unambiguous. To the extent the questions are unclear or ambiguous, any resulting uncertainty will be resolved against the insurer.